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Tuesday, January 27, 2009

Maged Shawky: Egypt’s capital market ‘ready for innovation’

During this sobering chapter in history of the financial world, Egypt’s emerging capital market is moving forward with its plans, readying itself for times of recovery.

Coming off a volatile year, which saw Egypt’s benchmark CASE 30 index lose almost 60 percent of its value, officials and regulators are saying that the time to innovate and restructure is now. That way, the market will be prepared when world markets recover.

The development of trading systems and the launch of new instruments — such as futures, options (short selling) or margin trading — are happening at a time when the collapse of the US financial system is being linked to the abuse of similar products.

While the local market is using this time to recognize its trading system and learning to assess risk, clearly the direction is to continue as planned.

Chairman of the Egyptian Stock Exchange Maged Shawky recently sat down with Daily News Egypt to talk about the new trading platform and the outlook for Egypt’s capital market.

“Our strategic plan to develop our market and to introduce new products or instruments or ideas will continue, and not halt because of the crisis or slowdown. We will continue with our strategic plan as is,” he said.

“We are a market ready for new ideas and innovation. We have lagged behind for quite a while in the past and the Stock Exchange managed to survive crises. But it has mostly been reactive to strategies. Now it’s about time we create things the market may demand in the future.”

Here, Shawky referred the launch and development of a derivatives market that would allow for hedging and speculation. Though this is a “downtime for world markets, setting up the infrastructure, regulations and surveillance for the system now is the plan, so when the market is ready to trade we are there and ready.”

Shawky explained the difference between types of derivatives, in terms of their legal nature and the way they were traded recently in other capital markets.

“Skepticism does occur because everybody talks about the trigger of derivatives in the subprime crisis, which is true, but the derivative market the US or Europe speaks about is an OTC (over-the-counter) market, privately negotiated contracts.

“What we are talking about in Egypt is a well-regulated transparent derivatives market. Our plan is to start with a very simple type of contract, whether options or futures or the index. It is already traded abroad; we have about 200 million issues, €12 million on our CASE 30 index.

“Locally, we are planning what should be a good size for the Egyptian market. Not only will derivatives contracts be listed and transparent in its disclosure but also the underlying assets are well regulated and transparent.”

On the other hand, in the subprime issue, “the problem was that both were not transparent, privately negotiated, inflated in their evaluations since no precise regulations governed it,” he explained.

“On our side it is completely different, without reinventing the wheel we follow derivatives market rules and regulations that every international market has.”

Regulating and monitoring the market is key as the market develops. The Egyptian authorities are eager to confront these issues and to make them a top priority in terms of governance of the market.

“I can very confidently claim that we are far advanced in transparency and disclosure compared to the region and in terms of the enforcement of it as well. We used to have 1,150 companies listed. [This number has decresed to] 370 companies. Coincidently, last week we issued another amendment to a regulation that is stricter so we expect further delisting. It’s difficult to do this at a time when you need income, but we are looking for good quality not quantity now.”

Some are anxious about introducing margin trading at a time like this.

“Part of margin trading we can watch closely, another part we do not always see very well, either because it is unofficially or illegally done. On illegal operations of margin trading, we have managed together with the Capital Market Authority to put things more right. Recently there are at least 10 brokerage firms that had to raise their debt insurance; another five have been stopped from activity for 15 days.”

Moreover, plans to introduce “short selling are still there, but it will be made with ETFs [Exchange Traded Funds] listing,” which Egypt has already developed the regulations for.

ETFs are a fund that tracks an index, but can be traded like a stock. Investors can do just about anything with an ETF that they can do with a normal stock, and because ETFs are traded on stock exchanges, they can be bought and sold at any time during the day (unlike most mutual funds).

Today, looking at the structure of market capitalization, almost 90 percent of it is actually traded in the market, and they are all under strict disclosure obligations.

In other words, this is a real reflection of the market.

The new trading platform at the EGX is based on the NASDAQ OMX model and is a sophisticated upgrade and extension of technological, infrastructural and human resource capabilities. This will allow for rules, regulations and tools to be set up to gain higher exposure to global markets and exchanges.

“We worked with NASDAQ OMX for a year and a half, to have a system that accommodates the requirements and characteristics of the Egyptian market while at the same time being no different from any international trading engine.

“We involved and trained the local industry from the beginning. Basically brokerage firms and traders contributed more to the system than we really did.

“It has very important functions for us in terms of the market as a business.

We can operate several markets with different trading characteristics or rules and regulations. With this system we have an exchange traders fund listed on our board, we are trying to encourage cross listings of foreign companies and allow for a new instrument, a replica of Global Depository Receipts (GDR), Egyptian Depository Receipts. And any kind of sukuks, Islamic, non-Islamic, sectoral sukuks will be able to be traded.”

Shawky admits that their plans have been viewed by some as too aggressive in approach, and so they know efforts need to be made to “communicate to the market what we are trying to accomplish with new instruments, to provide a hedging facility to market makers and be the only one in the region to do so.”